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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Life and Debt

Posted by Muthu on March 6, 2011

In today’s issue (dated 13th March’11) of Nanayam Vikatan, I’ve contributed in the Q&A section. The typical blue shirt photo has been replaced by a new photo!  As always, thanks to Nanayam Vikatan team.

Yesterday went to Eloor library in search of the latest book written by Nassim Nicholas Taleb. For those of you who do not know, Eloor is the best library in Chennai for the book lovers. I’ve been a member of Eloor for last 9 years and reading around 6 books from there every month.

I saw lot of new books of Paramahamsa Nityananda getting added up showing us way to happiness and enlightment. On enquiry, I was told that there has been lot of demand these days for his books from readers.

I hit upon an idea. Though I do not follow any Guru, I don’t mind becoming one. Which other profession offers die hard followers, dominating power, vast sums of money and influence in the society? It’s nice to visualize Prime ministers, Presidents, Chief Ministers, Governors, businessmen, film stars and sports personalities eagerly getting my blessings. Applications are invited from followers. You’ve the early bird incentive of occupying the key positions in my spiritual empire. Hurry!

From my meeting with many people, I see what havoc debt creates in one’s life.

Last month, some one came to meet me after reading our blogs. He was keen to start investing in SIPs. But he has high interest loans like multiple credit card loans, personal loans etc. I suggested that he clears high interest loans first before getting into investing. Any sound investing cannot give returns matching these steep interest rates. Though my friends in stock, derivatives and commodities trading may say otherwise, you decide for yourself.

He was not very happy with my advice and probably might have started investing in SIP through someone else.

The only loan I encourage people to go for is home loans (subject to certain conditions which if I write would become a separate article) parallely along with investments. Depending on individual cases, I’m fine with certain other low cost loans.

In my opinion, the biggest asset one can have is zero debt.

Let us listen to what Warren Buffet has got to say on borrowing

Unquestionably, some people have become very rich through the use of borrowed money. However, that’s always been a way to get poor. When leverage (borrowing) works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbours get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices.

And as we all learned in the third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeros, even when it is employed by very smart people.

Leverage, of course, can be lethal to business as well. Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally, though, either because of company-specific problems or a world wide shortage of credit, maturities must actually be met by the payment. For that, only cash will do the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees. In September 2008, in fact, its overnight disappearance in many sectors of the economy came dangerously close to bringing our entire country to its knees.

We are forever conscious of the fact that you, our partners, have entrusted us with what in many cases is a major portion of your savings. In addition, important philanthropy is dependent on our prudence. Finally, many disabled victims of accidents caused by our insureds are counting on us to deliver sums payable decades from now. It would be irresponsible for us to risk what all these constituencies need just to pursue a few points of extra return.

Some people tell me that having loans gives them a sense of commitment. Commitment is good, if it comes from inside rather than due to external credit pressure.

My personal philosophy is always to have no loans. I prefer to pay cash and buy things. I’m aware that this attitude of mine may not produce optimum financial growth. I’m fine with that. To me financial independence is more important than social status.

We’ve our own house. We’ve some decent savings, if deployed, can take care of our monthly commitments. Most importantly we’ve no loans. I would prefer to keep it this way.

Even if forced to live out of savings, I would cut down my monthly expenses and still continue to save not less than 20% of our income. If you consume all you earn, inflation would overtake you and your consumption levels would keep coming down.

Even when my income was Rs.500/- a month, Rs.50/- was deposited in SB A/c for contingencies, though I’ve to cut down on very basic necessities of life.

Preserving money and growing it is more of attitude. Our family never get tempted to buy anything just because others buy it. We decide what we want and achieve it with out borrowing. If not achievable, there is no regret. We do not consider these things critical. If we’ve them, it is fine and if we don’t have them, we can live without it. I’m glad to have a life partner who shares the same wave length in this regard.

Even when I started earning well, I was only relying on public transport till I was able to save money and buy my first motorcycle paying full cash.

I see lot of people with very good income but negligible wealth. If your needs keep increasing with your income, it’s time for you to take a pause and reassess your priorities. Your income would not last forever. But expenses are certain till your death.

The greatest discipline in personal finance is living below your means.

Some of my friends who spent everything and borrowed when they had Rs.5000/- as monthly income, are spending everything and in debts even when they earn Rs.1 lakh+ per month. The only dialogue I keep hearing from them for the last 15 years is, if only they have X income, they would come out of debts and start saving. Many X’es have been achieved and still they remain the same.

As Benjamin Franklin put it aptly, if you know how to spend less than you get, you have the philosopher’s stone.

Also never lend or sign surety. You may make genuine exceptions in lending, depending on the situation. Many a times it’s better to gift than lend. Or lend, if it comes back, fine. Otherwise write it off as a gift.

Regarding signing surety, don’t co-sign for anyone other than your spouse (assuming your spouse is reliable and exhibits good financial behaviour).

Nine years ago, my neighbour approached me to be a surety for his son’s housing loan. I refused. He was a prominent man in local religious circle and his name would be displayed on posters of temple festivals. He was an ardent worshipper of a particular deity and asked me if not for him would I not believe in his deity in repaying the loan. I told him that it is very difficult for me to deal with the invisible for loan repayments and asked him to try the same line of argument with his bank manager.

As expected, he became cold towards me.

As a thumb rule, if you sign surety or lend greater amounts, you may loose both money and relationship. If you refuse, you would loose only relationship. Better to loose one than both.

2 Responses to “Life and Debt”

  1. amol said

    truely liked your articles.

    I am a great fan of all your valuable comments on subramoney blog. Have learn a lot from you

  2. Dr Ravi said

    Good article.knowingly or unknowingly I have been following the key features in your article.
    Thank you

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